Winding Up Petitions and Cross-Claims

I came across the unreported case of Josu Engineering Construction Sdn Bhd v TSR Bina Sdn Bhd [2013] MLJU 279 where Mary Lim J made a very thorough analysis of the issue of cross-claims and winding up petitions.This is a rare case where a cross-claim was successful in grounding an injunction to restrain the presentation of a winding up petition, even though the section 218 notice was based on a judgment debt.

There is a seemingly inconsistent position as to whether a genuine cross-claim (which exceeds the initial debt) is sufficient to oppose a winding up petition or to even ground an injunction to restrain the presentation of a winding up petition but this case carefully dissects the different Malaysian appellate authorities as well as other authorities from other jurisdictions.

BRIEF FACTS

The facts in Jose Engineering are important in understanding why the High Court allowed the injunction to restrain the presentation of a winding up petition. The Plaintiff and Defendant were earlier involved in litigation against each other in two different cases, and for ease of reference, I will call them the First Suit and the Second Suit.

In the First Suit, the Defendant succeeded in its counterclaim against the Plaintiff and then issued a section 218 notice seeking for payment under the counterclaim. There was an application filed for a stay of execution but with no hearing date fixed yet.

In the Second Suit, the Plaintiff in turn had obtained a judgment with damages to be assessed by the Senior Assistant Registrar. This was a final judgment as it was upheld by the Court of Appeal and leave to the Federal Court was dismissed. The assessment of damages had yet to be fixed for hearing and with the Plaintiff claiming that it had filed its bundles of documents and had prepared its witness statements. The Plaintiff’s contention is that its claim under the Second Suit judgment would far exceed the quantum of the First Suit’s counterclaim which was claimed in the section 218 notice.

LEGAL PRINCIPLES

The High Court’s analysis of the different authorities ran the gamut from the Malaysian cases of Pontian United Theaters Sdn Bhd v Southern Finance Berhad [2006] 1 CLJ 1067 (C.A.), People Realty Sdn Bhd v Red Rock Construction Sdn Bhd [2008] 1 MLJ 453 (C.A.) and Zalam Corporation Sdn Bhd v Dolomite Readymixed Concrete Sdn Bhd [2011] 9 CLJ 705 (C.A.) (where all the cross-claim arguments were dismissed) to the Singapore Court of Appeal cases of Metalform Asia Pte Ltd v Holland Leedon Pte Ltd [2007] SGCA 6 and Pacific Recreation Pte Ltd v SY Technology Inc & Another Appeal [2008] SGCA 1.

In general, where a debt is undisputed, an injunction to restrain the presentation of a winding up petition is generally refused. And a judgment debt is a clear undisputed debt. However, the High Court found guidance in the Singapore Court of Appeal Metalform decision which allowed an injunction to restrain the presentation of the petition even based on an undisputed debt due to the cross claim. The Singapore Court of Appeal rejected the New Zealand test of having to show that the winding up petition is “bound to fail.” In cross-claim cases, the appropriate test in allowing such an injunction that “there is a likelihood that the petition may fail or that it is unlikely that a winding up order would be made.”

APPLICATION

The High Court noted that unlike the facts before the Court, the earlier Malaysian cases did not involve a cross-claim in the nature of an interlocutory judgment. While the Defendant had a final judgment through the counterclaim, the Plaintiff was also armed with an interlocutory judgment which was also a final judgment. It was only the quantum of damages which had to be assessed. The cross-claim was therefore found to not only be genuine but also bona fide.

The injunction was allowed in restraining the presentation of the petition but on terms that the Plaintiff pay the full judgment sum to its solicitors to be held as stakeholders pending the assessment of damages.

CONCLUSION

This case, and the various authorities referred to in the decision, demonstrate the high threshold to be met in allowing a cross-claim to effectively defeat the right of a judgment creditor to present a winding up petition. This is understandable since the judgment creditor already comes armed with an undisputed debt through the judgment and has a statutory right to present a winding up petition. Whether the petition will be allowed at the hearing is another issue altogether. In litigation, the allegation of a cross-claim is sometimes only raised once the section 218 notice is presented and a cross-claim, exceeding the judgment sum, is cobbled together in order to try to prevent the presentation of the winding up petition.

Advertisements

Stay of Execution of Judgment May Be Insufficient To Prevent Winding Up

The Court of Appeal in Juara Inspirasi (M) Sdn Bhd v Tan Soon Ping [2012] 1 MLJ 50 considered an appeal against the grant of a winding up order based on a judgment debt. The primary finding was on the respondent company’s failure to file an Affidavit in Opposition (see the oft-cited decision of Crocuses & Dafodils).

The interesting point was that the Appellant (the debtor company in the High Court) raised the argument that there was an ad interim stay of the judgment at the time of the winding up order. As the company’s solicitors had not exhibited the stay order, there was no direct evidence before the High Court and it could be said that the High Court proceeded to make obiter findings.

The Court of Appeal nonetheless agreed with the High Court that a stay of execution of a judgment would not necessarily extend to staying or preventing a winding up because winding up is not a form of execution.

Strictly speaking, that is true in that winding up is not an execution proceeding. The forms of execution are spelled out in the Rules of High Court 1980 (and now the Rules of Court 2012) and it is well accepted that procedures like winding up and bankruptcy are not forms of execution. However, where there is a stay of execution of the judgment, for all intents and purposes, no further proceedings should be taken based on the judgment. The judgment debtor need not pay the judgment sum over to the judgment creditor with the stay of execution in place.

The strict application of this Court of Appeal decision would mean that even where there is a stay of execution of a judgment, the judgment creditor could still issue a 218 notice against the judgment debtor company. The debtor may then have to go through the process of applying for an injunction to restrain the presentation of the petition. It may then be debatable whether such an injunction can be obtained since the question is whether there is any bona fidedispute of debt. If the petition were to be filed and proceeded to hearing, the debtor may find itself at a real risk of being wound up notwithstanding the stay of execution. Just like in this case, the Court found that the debtor company was insolvent and there were other supporting creditors for the petition.

This shows the importance of ensuring that the wording of the stay of execution application and the eventual Order is drafted as wide as possible to include a stay of execution and to prevent or stay any further step in any winding up proceedings. So for instance in the unreported decision of Poh Loy Earthworks Sdn Bhd v Mascon Sdn Bhd, the High Court stayed the hearing of the Petition as there was a stay order drafted in general terms “staying the judgment” rather than specifically staying the execution of the judgment.

Receiver and Manager Can Co-Exist with a Liquidator

The Court of Appeal in Yayasan Bumiputera Sabah & Anor v Apoview Wood Products Sdn Bhd [2012] 7 CLJ 593 (see here for the Grounds of Judgment of the Court of Appeal) considered the issue of whether a receiver and manager (“R&M”) could continue with an action on behalf of a company when a winding up Order was granted and a Liquidator appointed. In this case, the action was in respect of machineries owned by the company.

The Court of Appeal held that a winding up of a company after the appointment of the R&M only terminated the R&M’s personal powers but not his in rem power in that the R&M continues to retain possessory rights conferred by the Debenture to take custody and control of all assets charged under the Debenture, as well as the right to institute an action in the company’s name for the recovery of such charged assets. In this case, the machineries had been charged under the Debenture. The R&M’s right to the machineries therefore did not disappear when they were wrongfully disposed of to a third party.

The winding up of the company would only deprive the R&M of any power to carry on the business of the company as its agent so as to create debts as against its unencumbered assets.

Hence, the R&M and the court appointed liquidator in winding-up can exist side-by-side and each exercised separate duties and powers under the Companies Act 1965, in particular s. 236 and the Debenture.